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Recession And Bear Market Ahead?

The almost unanimous view of economists just two months ago was that the U.S. economy would strengthen and finally have a real recovery this year. Earlier this year, the consensus was that GDP growth in the first quarter would be 2.5%-3%. Some estimates of Wall Street were for 4%-4.5% growth.

I was truly puzzled. Was I missing something? My view since late last year was that the economy would weaken in 2014 and even come to close to negative growth, which could turn into recession in 2015, depending on the 2014 election outcome.

In the meantime, the official first quarter growth estimate has come in at a miniscule 0.1% growth. Oh yes, “it was the weather” they say.

But don’t we have winter every year? When I was in graduate school, I had a couple of friends who had retail shops. I remember that they constantly used excuses for their stores’ business being bad: “it’s was too hot. It was too cold. It was raining and people stayed home. It was great weather so people went to the beach. It was a holiday and people went on trips, and it was not a holiday so people worked.”

Economists today remind me of that. My view on disappointing economic growth was and is simple: Washington is making it increasingly more difficult for businesses to do business. The trend is in the wrong direction. Large U.S. firms continue to move to other countries to escape the very high taxes and regulations in the U.S. Small companies probably spend more time on compliance than on making their business grow.

Now that Wall Street companies are finishing the sale of their own stock portfolios in preparation for the big stock market disappointment later (called “distribution”), their economists are allowed to be more candid. Now we are seeing the big changes in Wall Street GDP forecasts. S&P withdrew the 2015 forecast and changed the status to “under review.” Some major financial firms now estimate that first quarter growth was minus 0.2%, to one even estimating minus 0.8%.

That’s a huge change in direction, but it isn’t mentioned by the bulls you see in the media. They continue to lull investors into complacency.

I ask, isn’t it logical that when economic forecasts go from stronger growth to actual contraction that all the optimistic earnings forecasts will not materialize? And when profits are revised downward, so are stock prices.

When doing your own research, search for “company total earnings,” not the EPS. Furthermore, please ignore the earnings reports “beats” of Wall Street estimates. This is total garbage aimed at presenting a false picture of strength. When Wall Street sees that their forecasts won’t be reached, they just reduce their estimates sufficiently so that the company can “beat” the estimates. That’s how they can claim that “80% of companies have beaten estimates.” It’s all smoke and mirrors.

Furthermore, sales (often called “top line growth”) are also disappointing. They are now expected to increase by only 2.6% this year. In our opinion, they will decline on an inflation-adjusted basis.

Retails sales for April grew a disappointing 0.1%. That’s suspiciously close to zero. If you factor out inflation, sales were actually down. Even AppleApple stores saw a 5% sales decline in March.

Economists say that there is decent credit growth that supports the theory that the economy is growing. Yes, for many years we looked at credit growth as the single most important indicator for the economy. But that has changed.

Now the only credit growth is in student loans and auto loans. And these have lower creditworthiness than an I.O.U. from your “friend.” But these loans are made because Wall Street repackages them and sells participations in these pools just as they did during the subprime mortgage loans. As large pension plans and their managers “reach for yield,” they don’t care about future defaults. By that time the managers will be elsewhere and the firms which sell these bear none of the risk.

Not counting student loans and car loans, total credit growth is declining, confirming my thesis that the economy is weakening. But the economists you see in the media don’t tell you that.

With all the new tax increases, job-stifling regulations, ACA cost increases in the U.S., and the problems in China, Eastern Europe and parts of Latin America, it will take more than a miracle to produce a genuine economic recovery. The current growth is mainly an illusion produced by manipulating the statistics, including employment, inflation and GDP growth.

Unfortunately, most economists never studied the Austrian School of Economics that tells how the real economy functions in an over-indebted financial systemthat the central banks are trying to stimulate with even more debt.

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